Balance transfer credit cards

What is a balance transfer credit card?

A credit card balance transfer is a feature that allows you to move existing debt from one credit card (or multiple cards) onto a new one with a lower interest rate. This rate can be low or even 0% for a set introductory period, which can last anywhere from 6 to 24 months. There is technically no such thing as a ‘balance transfer credit card’ – this is just a common way of referring to a standard credit card that comes with one of these offers.

Are credit card balance transfers worth it?

If you’re looking to pay down some credit card debt, then a balance transfer offer with a low introductory rate can be appealing at first glance. It’s important to understand, though, that when the intro period ends, the interest rate for any money still owing will tick over to a much higher ongoing rate known as the revert or cash advance rate. This can be as high as 29.99% p.a., based on cards on Canstar’s database.

It’s also important to understand that any new purchases you make with a card like this will immediately attract a higher interest rate known as the purchase rate, which can be as high as 12.99%, based on cards on Canstar’s database. In short, if you don’t use a credit card balance transfer carefully, you could find yourself stuck with much higher repayments and getting even further into debt.

How does a balance transfer credit card work?

To show how balance transfers can work if used responsibly, consider the following example: Sam has $3,000 in credit card debt. He decides on a balance transfer offer of 0% interest for 18 months, with a one-off balance transfer fee of 3% on the amount transferred, and a $0 first year annual card fee with a $50 ongoing annual card fee.

• The new debt includes the 3% fee, bringing the total outstanding balance to $3,090.
• Following the transfer, Sam closes his previous credit card. 
• He sets up automatic monthly repayments of $200 and adds five additional repayments of $100 when he can.
• Sam makes NO new purchases on the card.

Sam is able to pay off his debt in 14 months, paying no interest, just the $90 transfer fee and $50 second year card fee on top of the repayments.

What if you don’t clear your balance in time?

To get an idea of what can happen if you don’t clear your balance before the introductory period ends, consider the following example: Barry has $3,000 in credit card debt, and decides on the same balance transfer offer as Sam.

• Barry decides he wants to make additional purchases for some unexpected expenses, and spends $100 each month on the card.
• He only makes the minimum repayments, which the card issuer has set to 3% of the total balance owing.

By the end of the 18 month introductory period, Barry’s debt has grown to $5,920 because the 0% introductory rate did not apply to additional purchases, and instead they immediately began accruing interest at the card’s high 21.99% purchase rate. By choosing to repay the minimum amount only, Barry is now stuck with almost double the amount of debt he had to begin with.

What are the pros and cons of balance transfer credit cards?

Pros:

• Can help consolidate and pay down your credit card debt faster.
• Introductory periods can offer appealingly low rates.
• Potential to streamline several credit cards down into one with a lower rate.
• Can improve your credit score if used responsibly, by lowering overall use of credit and building a positive repayment history.

Cons:

• High interest rate if you fail to repay remaining balance before the intro period finishes.
• Balance transfer fees or annual fees can reduce overall savings and should be factored in.
• New purchases usually attract interest immediately, which can increase debt.
• Could hurt your credit score if repayments are missed or overall debt increases.

What fees are involved with a balance transfer card?

The main fees and interest rates to consider when choosing a balance transfer card are:

• The one-off balance transfer fee, often between 1–3% of the amount transferred.
• Annual card fees, which may be waived in year one.
• The introductory interest rate, which you’ll need to pay in the intro period, unless you opt for a 0% balance transfer offer.
• The purchase rate, which applies immediately to any new purchases made on the card.
• The revert rate, which applies to any transferred balance remaining after the intro period ends, and is typically higher than the rate charged for new purchases.
• Late payment fees, which apply if you miss making the minimum required repayment. Even if you are not being charged interest (in the case of a 0% intro rate) the card’s minimum monthly repayment will still apply.

Should I choose a balance transfer?

When a balance transfer could make sense

• You are confident you can pay off the balance (or a large portion of it) within the low- or no-interest intro period.
• You are committed to stop making new purchases on your old or new card.
• You want to bring multiple card balances together in one place under a lower rate.

When to avoid

• If regular repayments are already a struggle, a balance transfer could simply move your debt to a new card without lowering the total interest or making it any easier to pay off.
• You’re likely to use the new card for everyday spending (purchases often don’t come with the same low rate).

If you have a poor credit history or already have a lot of debt, you might not be approved for a new card at all.

If you’re finding it hard to cover your regular expenses, keep up with repayments, or are borrowing to pay for everyday living, opening another card could make things harder in the long term.

Consider other ways to tackle your debt: A personal loan can be an alternative to a balance transfer offer, says Canstar’s Data Insights Director Sally Tindall. “This can be a nice structured way to pay down debt in equal chunks without the temptation to add to it, like a credit card, which you can pull out at the shops. If you want to extend the amount of credit with a personal loan, you need to reapply. It’s a far more structured way to pay down debt, and can provide good structure for someone who really needs that to help clear debts.”

How to choose the best balance transfer credit card

The ‘best’ balance transfer offer will ultimately depend on your financial situation and personal needs.

• If you have a larger debt and are not confident you’ll repay all of it, consider both the introductory rate and the revert rate, as the balance may not get paid off within the introductory period.
• If you have a smaller debt and are confident you’ll be able to pay it, then you may want to look for a card with a low rate and a short introductory period, to get things done and dusted and avoid paying more fees than you need to.

What can you do if you’re struggling with debt?

If you’re struggling to stay on top of debt, then rather than taking out a new credit card that could see you in a deeper financial hole down the line, it can help to take a step back and get support. Here are some resources that might help:

• National Debt Helpline: Free financial counselling and guidance for managing credit card debt and loans. Call 1800 007 007 or visit ndh.org.au
• Moneysmart: Tools and guidance for managing debt, including credit cards, and understanding your rights with lenders. Visit moneysmart.gov.au
• Services Australia: Information on financial assistance, including support for managing debts. Visit servicesaustralia.gov.au
• The Salvation Army: Emergency relief and support services for those struggling with living expenses and debt. Visit salvationarmy.org.au